Two accounts, two advertised rates, and the higher one is not always the one that pays you more. That is the whole reason tax-equivalent yield exists.
A savings account paying 4.50%, a Treasury bill paying 4.30%, and a municipal bond paying 3.60% do not arrive in your pocket the same way. Each is taxed differently at the federal, state, and local level. Tax-equivalent yield is the arithmetic that puts them on the same footing so you can compare them honestly.
The three tax treatments
Interest from a bank savings account, a money market account, or a CD is ordinary income. The federal government taxes it at your marginal rate, and if your state has an income tax, it taxes that interest too. Your bank sends a 1099-INT in January for anything over $10, and the IRS gets a copy. Nothing about that interest is sheltered.
Treasury securities work differently. Interest from T-bills, notes, and bonds is subject to federal income tax but exempt from state and local income tax. If you live in Texas or Florida, that exemption is worth nothing to you. If you live in California or New York City, it is worth quite a lot.
Municipal bonds flip it. Interest from most munis is exempt from federal income tax, and if you buy bonds issued in your own state, the interest is usually exempt from that state’s income tax as well. A New York resident holding New York municipal bonds can end up with interest that no level of government touches.
That last case is why a muni yielding less on paper can still beat a savings account paying more.
The formula
Tax-equivalent yield answers one question: what would a fully taxable investment need to pay to leave you with the same money after tax?
Divide the tax-free yield by one minus your combined marginal tax rate.
A 3.60% muni for someone in the 24% federal bracket: 3.60 divided by 0.76 gives 4.74%. So that muni does the same work as a taxable account paying 4.74%. Against a savings account at 4.50%, the muni wins on yield alone.
Move that same bond to someone in the 12% bracket and the math collapses. 3.60 divided by 0.88 gives 4.09%, which loses to the 4.50% savings account. Same bond, same yield, opposite conclusion, and the only variable that changed was who owned it.
This is the part people miss. Tax-exempt investments are not universally better. They are better for people with high marginal rates, and increasingly worse as your rate falls. A muni bond is essentially selling you a tax break, and it prices that break into a lower yield. If your tax break is small, you are paying for something you cannot use.
What the numbers actually look like right now
As of mid August 2026, the top nationally available savings accounts are paying roughly 4.15% to 4.50% APY, with NerdWallet tracking accounts up to 4.21% and other trackers finding a few at 4.50%. Meanwhile the FDIC’s national average savings rate sits at 0.38%, which tells you most of the country is not shopping.
On the Treasury side, the 10-year is yielding around 4.68%, and 20- and 30-year issues are close to 5%.
Municipal yields have been unusually attractive. High-grade, long-term munis have been yielding close to 5%. Lower down the credit ladder, the Bloomberg High Yield Municipal Bond Index yielded 5.53% as of late May 2026, which works out to a tax-equivalent yield of 9.34% for someone at the top combined federal rate of 40.8%, per Lord Abbett’s midyear municipal outlook. That 40.8% figure is the 37% top bracket plus the 3.8% net investment income tax.
Notice how much of that headline 9.34% comes from the tax assumption rather than the bond. Somebody in the 22% bracket looking at the same index sees a tax-equivalent yield closer to 7.1%. Still good, but a very different number, and the fund marketing usually quotes the version that flatters the product.
Where the comparison gets slippery
Tax-equivalent yield compares yields. It does not compare risk, and treating it as a full comparison is where people get hurt.
A savings account at an FDIC-insured bank is insured up to $250,000 per depositor, per bank, per ownership category, and the balance does not move. A Treasury is backed by the federal government but its market price fluctuates if you sell before maturity. A municipal bond carries credit risk from the issuing city, county, or authority, plus interest rate risk, plus liquidity risk, because individual munis can be hard to sell quickly at a fair price. High yield munis carry all of that with weaker issuers attached.
There is also a wrinkle around the alternative minimum tax. Some private activity municipal bonds pay interest that is exempt from regular federal income tax but counted for AMT purposes. If AMT applies to you, the effective yield on those bonds is lower than the tax-equivalent math suggests.
And tax-exempt interest, while not taxed, still appears on your return and can affect how much of your Social Security benefit becomes taxable. That is a real cost for retirees that the formula does not capture.
A practical way to run it
Start with your combined marginal rate, meaning your federal bracket plus your state rate, adjusted for whether you itemize. Then compute the tax-equivalent yield of any tax-advantaged option and line all three up.
For a Treasury, the adjustment runs the other direction. You are not converting a tax-free yield to a taxable equivalent, you are recognizing that the Treasury escapes state tax while the savings account does not. A 4.30% Treasury for someone paying 6% state income tax is roughly equivalent to a savings account paying about 4.57%, since the savings interest loses 6% of itself to the state.
If you want to check your arithmetic, the MSRB’s investor site and most brokerages publish calculators that do this in one field.
The boring conclusion that happens to be right
Yield comparisons across tax treatments are one of the few places in personal finance where a two-minute calculation genuinely changes the answer. But money you might need in the next year or two belongs in an insured savings account regardless of what the math says, because the tax-equivalent yield of a bond you had to sell at a loss is not a number anyone wants to compute.
Where the comparison earns its keep is on money you are parking for years, in a taxable brokerage account, when your marginal rate is high enough that the tax break is worth something. That is a narrower situation than the fund brochures imply.